Regulatory: Can a corporation be liable for “violating” an ambiguous regulation?

Companies in heavily regulated industries such as healthcare, government contracting and financial services face the constantly evolving challenge of complying with complex and often incomplete regulatory schemes. With full implementation of the Affordable Care Act and the Dodd-Frank Act still to come, this challenge will only increase.

If a corporation fails to comply with key regulations that govern its business activities, the consequences can go well beyond regulatory sanctions. The corporation may also be exposed to punitive criminal and civil False Claims Act liability. In fact, it is not unusual for the Department of Justice and False Claims Actwhistleblowers to rely on alleged regulatory violations to pursue criminal investigations or False Claims Act complaints against corporations. Perhaps most troubling, criminal and False Claims Act allegations sometimes invoke regulations that are unclear or incomplete and thus fail to provide corporations with adequate notice about exactly what the law requires. In such circumstances, government lawyers and whistleblowers often point to administrative agencies’ guidance statements, advisory opinions, or other informal pronouncements to support their theories. Due to the increasing pace and complexity of regulation, companies will continue to face the challenge of anticipating what the law requires in the absence of full information.

When defending their corporate clients in such circumstances, enforcement counsel can benefit from having a clear understanding of and experience with the applicable regulatory law. Increasingly, it can also be critical for counsel to be well-versed in administrative and constitutional law principles that, in some instances, may provide strong additional arguments against liability.

Can a corporation be liable for “violating” an ambiguous regulation?

Nearly 30 years ago, the Supreme Court held in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. (1984) that, where a congressional statute is ambiguous, a court must defer to agency regulations that provide a reasonable interpretation of the statute. The issue gets more complicated, however, when principles of agency deference conflict with principles of due process and notice that have special force in the context of punitive government enforcement activity, such as a criminal prosecution or suits under the False Claims Act.

In a perfect world, an agency’s regulations would always state clearly what conduct the law requires and what conduct the law prohibits. Unfortunately, the world is not perfect. Regulations are often so opaque, internally contradictory, or voluminous that even the best lawyers do not interpret them the same way. Agencies may seek to add clarity through informal means, such as guidance statements, advisory opinions, program manuals, and even legal briefs. However, while corporations are certainly well-justified in heeding informal agency pronouncements when crafting forward-looking compliance initiatives, these informal agency pronouncements lack the force of law. When the question is whether a corporation should be hit with punitive criminal or civil False Claims Act liability for alleged regulatory violations, government lawyers and whistleblowers should not be permitted to rely on informal agency pronouncements to support their putative claims. Yet, they often try to do so. For example, federal prosecutors frequently have pointed to informal FDA guidance documents to support criminal allegations that a drug or device manufacturer engaged in unlawful “off-label promotion.” And recent whistleblowers have relied on Department of Health and Human Services Office of the Inspector General guidance statements to press False Claims Act complaints alleging that certain pharmaceutical purchasing agreements violated the Anti-Kickback Statute regulations.

Federal courts lately have seemed attuned to—and skeptical of—such attempts to use informal agency pronouncements to overcome regulatory ambiguity that otherwise ought to preclude liability. Last year in Christopher v. SmithKline Beecham Corp., the Supreme Court held that it was inconsistent with “fair warning” principles to impose “massive liability” on a party based on informal agency statements that were released after the conduct at issue occurred. Though it involved a different regulatory backdrop, the Eighth Circuit echoed a similar principle last month in United States ex rel. Ketroser v. Mayo Foundation, agreeing that False Claims Act liability cannot “attach when the defendant’s interpretation of the applicable law [was] a reasonable interpretation . . . .” These decisions seem to recognize that, until the agency clearly chooses between permissible constructions of an ambiguous statute or regulation, a regulated entity that conforms its conduct to one such permissible construction cannot fairly be said to have violated the regulation at all. When their clients are alleged to have violated regulations that are susceptible to more than one reasonable interpretation, enforcement counsel should seek to take advantage of this important trend in the case law.